When Bernard Madoff was arrested, investigators discovered that for at least 15 years he'd done no trading for investors -- the monthly statements they received were falsified.

Madoff claimed to be trading using a strategy known as split-strike conversion. "I promised to clients and prospective clients that client funds would be invested in a basket of common stocks within the Standard & Poors 100 index," he explained in his confession (PDF). "… In addition, I promised that as part of the split-strike conversion strategy, I would hedge the investments I made … by using client funds to buy and sell option contracts related to those stocks, thereby limiting potential client losses caused by unpredictable changes in stock prices."

Weren't There Warning Signs?

There were.

FRONTLINE, with the help of an options expert and an accountant, analyzed a small sample of Madoff's statements and found some red flags:

Investor cash was often moved into a Fidelity Spartan U.S. Treasury money market account. That fund changed names in 2005 and was closed to new investors. In addition, Fidelity had no record of Bernard Madoff ever having an account with Fidelity. (See Page 1 of the statement below.)

Clients had no electronic access to their accounts. Instead they received monthly statements in the mail.

His stock-trading pattern was unusual. In the statement below, Madoff sells the investor's entire portfolio of stocks on Sept. 17; those stocks had all been bought on the same day one month earlier. But some months he didn't do any trades at all -- for example, in the statements FRONTLINE examined, Madoff only traded in April, May, August and September of 2008.

Madoff only traded S&P 100 index options, despite the fact that it is now much more common to trade S&P 500 index options. That market is approximately 20 times bigger than the S&P 100 index options market. (See Page 6 of the statement below.)

Madoff also claimed to be trading all his options "over the counter" rather than through an exchange.

Madoff statements accounted for cash balances in an unusual way. Options accounts would have a cash surplus and securities accounts would carry a cash deficit. (See Page 4 and Page 6 of the statement.) But Madoff didn't consolidate those accounts on a monthly basis, as is normal. Instead, he brought them together only at the end of the year.

At year's end, Madoff moved investors' money entirely into Treasury bills. As whistleblower Harry Markopolos explained in his now famous memo, "any unusual transfers or activity near a quarter-end or year-end is a red flag for fraud."

Below are some documents from an investor who had a direct account with Madoff. The account statement is from September 2008 -- a month in which markets fell but the investor still saw positive returns.

Account Statement

This six-page statement shows the alleged trades in one investor's securities and corresponding options accounts.

CLICK ON THE PURPLE PLUS SIGNS OR PAGE NUMBERS TO LEARN MORE

Trading Slip

Every time Madoff traded a stock, Treasury bill or option, the investor would receive a slip like this in the mail two to five days after the trade.